Samsung's new Galaxy S7 lacks 'wow' factor

JonathanCheng

BARCELONA-- Samsung Electronics Co.'s new flagship smartphone offers few new bells and whistles, in a sign of the challenges facing the South Korean technology giant in an increasingly saturated market for premium handsets.

The high-end Galaxy S7 and its curved-screen companion, the Galaxy S7 Edge, released on the sidelines of the Mobile World Congress trade show Sunday, look strikingly similar to their predecessors and lack fresh showcase features to set them apart in a crowded field of Android handsets.

The smartphones come with an improved camera and longer battery life, in addition to two features that had been dropped from the S6 last year: Removable memory storage and water resistance. The Galaxy S7 Edge features curves on all four sides of the device, versus the two-sided curve screen on last year's Galaxy S6 Edge.

The lack of a clear showstopper shows the pressure that Samsung's new mobile chief, D.J. Koh, is under to innovate. It also underscores the importance of the technology giant's push into cheaper handsets as a sales driver. Mr. Koh was promoted late last year as Samsung's mobile chief to replace J.K. Shin as part of the company's annual management reshuffle.

In recent months, Samsung mobile executives have talked up the importance of handsets priced between $75 and $150 in emerging markets like India, Indonesia and Russia, where many consumers don't yet own smartphones. Sales growth for this year in that segment is set to far outpace that of the premium smartphone market. In the fourth quarter of 2015, smartphone sales in emerging markets grew 13.5% from a year earlier, compared with just 1.5% growth in mature markets like the U.S., according to research firm Gartner.

But competition is heating up in that segment as well. The larger problem for Samsung, even if it succeeds there, is that most of the company's mobile earnings come from the premium segment of the market, where profit margins are juicier.

Daniel Kim, an analyst for Macquarie Securities in Seoul, estimates that Samsung's flagship smartphones account for about 70% of its annual mobile profit and about a third of the company's total profits.

Analysts say that with innovation slowing and midrange phones matching many of the capabilities of high-end phones, there is little that Samsung's executives can do to reverse the company's fortunes.

"I don't think they're happy about this, but there's not much they can do about it," Mr. Kim said. "Growth in the smartphone market is dead, and no one is free from this trend--Apple, Samsung, LG, even the Chinese."

Pushing the Galaxy S7 could be a difficult sell at a time when many consumers say that their existing handsets are good enough. At the Mobile World Congress, Xiaomi Corp., China's biggest smartphone maker, and ZTE Corp., as well as LG Electronics Inc., Sony Corp. and a bevy of low-cost handset makers are releasing new flagship smartphones with price tags lower than Samsung's flagship phones. Samsung didn't disclose the price of its new handsets, but typically its high-end devices cost more than $600 without a carrier contract.

Samsung's mobile division has been suffering from two years of tepid demand. The poorly-received Galaxy S5 and the misreading of demand and supply for the Galaxy S6 and the Galaxy S6 Edge crimped mobile earnings. In the last three months of 2015, operating profit for Samsung's mobile division was down 60% from two years earlier.

Analysts expect Samsung's operating profit this year to decline 10% from 26.4 trillion won ($21.5 billion) last year and revenue to shrink for the third year in a row.

"Samsung really needs to show key carrier partners that the company is capable of bringing in notable changes to the phone in a way that would be acknowledged as innovation," said Greg Roh, a Seoul-based analyst with HMC Investment & Securities. He said Samsung will need to introduce next-generation form factors like foldable devices as soon as possible.

Mr. Koh, the Samsung mobile chief, will be under the microscope this fall with the annual refresh of the Galaxy Note series of smartphone-tablet hybrids.

"That will be a lot more telling of his contributions," Mr. Roh says.

In his first public appearance since taking over as the head of the business, Mr. Koh said this week in a video: "I am very confident about the result of our hard work for the past several months and can't wait for our consumers' feedback."

Macquarie's Mr. Kim sees the new chief's main test as defending the position Samsung has established as the world's No. 1 seller of smartphones, at a time when the global market for high-end smartphones has stopped growing.

Key to that effort is in software and services, including the company's mobile payment service, Samsung Pay, and its enterprise security platform Knox.

Mr. Koh, a longtime Samsung executive who is credited internally with overseeing the company's push into software and services, will lead the rollout of Samsung Pay this year in China and parts of Europe--despite the fact that the service doesn't generate any revenue for the company.

"They want to lock in their customers," says Mr. Kim. "They don't want to lose more customers to Apple."

Write to Jonathan Cheng at jonathan.cheng@wsj.com and Min-Jeong Lee at min-jeong.lee@wsj.com

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